Today we’re going to take a look at single puts and single calls.
Question from Travis:
“I’ve learned from your video that there are two more ways to make a potential profit being just a seller or an alone versus being a buyer thinner seller. I’ve been told that when you’re looking for a call, of course, you buy a support. You want to sell it resistance, and when you’re looking for a put, you want to buy it resistance and follow it down to support to make money.
When buying a put, I guess my problem is adding the potential percentage profit to it and setting a stop limit to it.
My question is in reference to writing to put how do you at your potential profit percentages, which give you a different price for the put to reach in order or before your sale?”
Most people trading single puts single calls is not the right approach, especially on the buying side. When you buy something like a single put or single call, you’re losing money on the theta decay.
You must understand that this is a classic mistake for most people starting with trading options. They’re trading it the wrong way.
Making Money from Time Decay and Theta
The better and smarter approach is to do spread so you can make money from the time decay and theta. Here’s Amazon trade I put on a while back.
Even though it’s going outside my range over here, we’re still profitable about $136. Even with the market downturn that we’ve had. This is the market movement we’ve had, and we’re still profitable.
That’s how you make money in options. That’s a better and smarter approach.
Looking at Single Puts and Calls
Take, for example, Facebook. If you’re looking at buying at support, selling at the resistance, I mean you’re trading stock in the same way. Or you’re trading options in the same way that you would trade stock. Here if you’re looking at Facebook (looking at the daily), let’s say you’re here at 160.
You would probably want to buy a call here. And if you’re buying a put, you probably buy a put somewhere up high. And then you make a profit on the way down. That’s a typical approach, but the problem with that is when you’re trading single options, they’re like dead fish. They start to rot very quickly. That’s because you’re losing money very quickly.
In that case, you want to go further out; you want to minimize that theta decay. Or maybe do a vertical – that slows things down a little bit. It’s a better approach. The big point I want to make from this thought of this question is this. If I think Facebook’s going to bounce, let’s say I buy a single right here. Watch the problem that we have.
Our problem is we lose $7 every day. If I did this similar thing with a put, you lose about $5-$6 a day. You’re losing. You could right-click and buy a vertical. Or you could buy protection just one strike down. You could buy one in the money if you wanted.
Here we are buying one and let’s say we are selling one. I have a vertical this way. I could sell one at different prices, and that’ll change my vertical around. Now, I have a vertical that’s to the upside. If you’re looking for it to move higher, I could do something like this.
And now all of a sudden, that theta decay gets cut a little bit. I could move this around.
Always Use This Approach
Let’s say the current price is 180. I could bring the one I’m buying right at the money, the one I’m selling around 190. And now my theta is way less than it was before. I also use a lot less capital than before. That’s the smarter approach I think as far as buying it support but letting it bounce and go into resistance. You’re constantly guessing and taking chances, which statistically, as you get better at it, it should work out.
But if you’re trading options and you already know and understand options, then there are better ways to do that. That’s the thing and the power behind options. You don’t have to have a guessing game of where the stock is going to go. You could set up spreads to where they’re non-directional. But if you’re doing singles, it’s a losing bet on a day to day. You need that stock to move, and you need to move very quickly to offset the time decay.
Otherwise, take a look at this – $8 losing per day, and then if you set it up as a vertical, you’re only losing $1-$2. That’s a smarter approach to doing it as far as taking profits.
You could set it up. There are so many strategies you could set it up. For example, if I get a bounce at the 160, I get into my single or vertical. And then I slowly take profits off into strength. Percentage-wise, that’s just a matter of how good you are with it. And how much risk you want to take on. Some people are riskier than others.
Some people start with five contracts, and then with time, they take off one, and they take off another one until they’re fully out of their position. That’s just a matter of perspective of your risk tolerance strategy. But the big thing here to understand is that doing singles it’s a good starting point. However, it’s not the right approach to trading options.
Eventually, you’ll probably want to get into something more like verticals if you’re doing directional. Even then, there might be better approaches with like butterflies, calendars. Calendar trades at least can do non-directional things as I showed you here with Amazon. That is not as much of a moneymaker as I had the other week when I showed this. But still making $130 here on the account is not a bad deal.
It’s a lot better to do something more like this because you’re not worried about where the stock moves. And you could set these up a little more bullish. And you could set them up a little more bearish and still making money and profit. That’s where you want to get to with options. That’s the smarter approach.
You could do singles. You could buy a single put, single call and you could sell a single. Also, you could sell a single puts, sell a single call. There are four parts to those.
There are four areas:
- buy a put
- buy a call
- sell a put
- sell a call
Also, there are come combinations as well. You have so many variations and choices and very creative strategies that you can get to.
Don’t think too linearly about it and look at the bigger picture.
Ask yourself where you want to go, what’s possible and what’s the next level.